Microsoft (MSFT) has had a breathtaking year. After nearly 50 years in business, the tech giant has crossed the $ 2 trillion mark market capitalization mark in June, by joining an exclusive club who understands Apple and, for a brief moment, Google parent Alphabet. As of December 6, Microsoft was worth $ 2.4 trillion.
Over the past 52 weeks, Microsoft’s share price has climbed 45%, far outstripping the broader S&P 500, which has risen 21%, not to mention rivals Apple (AAPL) and Amazon (AMZN) , which saw their prices increase by 23% and 5.5%, respectively.
The company’s financial reports were just as impressive as its market capitalization. In the past 12 months, the software giant has posted a whopping $ 176 billion in revenue, an increase of nearly 20% year-over-year.
But Microsoft has always been a cash cow. It operates in the high margin software industry.
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What’s really impressive is that, under the leadership of CEO Satya Nadella, the 46-year-old company is diversifying and thriving into new ventures, including cloud computing, connectivity apps like Teams, and social apps like LinkedIn.
Equally remarkable is that Microsoft has thrived while avoiding the public backlash or antitrust scrutiny that its Big Tech peers like Amazon, Facebook (FB) and Apple have faced. It is for these reasons and more that Yahoo Finance named Microsoft Company of the Year 2021.
Microsoft reinvented itself by cannibalizing itself
Bill Gates and Paul Allen founded Microsoft in 1975, creating what would become the world’s most widely used operating system. Gates remained CEO for decades until he stepped down in 2000 and Steve Ballmer took the reins. The duo saw Microsoft go through a number of product releases and major challenges, the most significant of which was Microsoft’s antitrust battle with the Department of Justice which lasted until 2002.
[See also: Why Microsoft avoided antitrust scrutiny that plagued other tech giants in 2021]
And while Microsoft is a reborn tech giant in 2021, the distraction caused by its antitrust fight and a series of mistakes has caused it to spend years fighting for its relevance among its Big Tech peers.
Microsoft has failed to enter the smartphone market, despite spending more than $ 7 billion to buy Nokia. While LinkedIn has performed well, Microsoft’s social media capabilities are still eclipsed by Facebook. And when was the last time you tried Bing your own name rather than Google (GOOG, GOOGL)?
But in 2010, the company released Azure, a cloud-powered version of Windows, and it hasn’t looked back. It is now one of the largest cloud providers in the world, offering the latest cloud services and ranking second in market share only behind Amazon Web Services from Amazon.
These efforts, however, have forced Microsoft to reinvent itself. Rather than selling individual software, she started selling subscriptions that generate recurring revenue. While individual sales generate more revenue in the short term, subscriptions bring in more money overall.
Its Office products, for example, are now primarily available as cloud-based products for commercial and consumer applications. And in the first quarter of fiscal 2022, that meant 18% and 10% revenue growth for commercial and consumer businesses, respectively.
[See also: How Microsoft saved itself from social media scrutiny]
“For so long, [Microsoft] resisted cloud computing and opening their software and running it on other devices because they thought it would cannibalize Windows, because it was their profit machine, ”said Scott Snyder, senior researcher at the Wharton School at the University of Pennsylvania, at Yahoo Finance.
“Everyone back then saw the cloud as a fledgling business,” said Snyder, author of “Goliath’s Revenge: How Established Businesses Turning the Tides in the Face of Digital Disruptors. “
But Nadella – who helped grow Microsoft’s cloud business before becoming the company’s third CEO in 2014 – saw the opportunity. And it was the cloud that pushed Microsoft above the $ 2 trillion mark in 2021, analysts said.
“But then you start to add these other things that they bring, whether it’s LinkedIn, other kinds of platforms that can allow people to start relying on Microsoft solutions. They are really well set up to help businesses with their digital transformation for a long time, ”added Snyder.
While Microsoft had around 20% global cloud market share in 2020 behind Amazon’s 41%, the software publisher is slowly gaining in the Everything Store.
Microsoft’s cloud business has been particularly unstoppable over the past year. Over the past four quarters, the segment has exploded with year-over-year increases of 34% in the second quarter, 23% in the third quarter, 30% in the fourth quarter and 36% in the first quarter of the fiscal year. 2022.
“I think investors underestimated the story even up to 2021, believing that there wasn’t as much gasoline left in the growth tank,” Wedbush analyst Dan Ives told Yahoo Finance.
“Instead, it’s actually accelerated, because it’s a perfect demand storm. It’s with more businesses moving to the cloud. You’ve seen Azure gain share over Amazon and AWS. And the stock has now started to be reassessed as a cloud computing company, rather than traditional Microsoft. It’s not your grandfather’s Microsoft anymore, ”Ives added.
Even more room for growth
Microsoft’s cloud growth shows no signs of stopping either. The company now offers cloud-based versions of IT infrastructure, web hosting and Office services, as well as on-premises versions of its server software.
According to Ives, only 30% of Microsoft’s enterprise install base has moved to the cloud, leaving a huge opportunity for growth to come.
“In our opinion, it’s not about whether it’s when this company hits a market cap of $ 3 trillion,” he said.
It’s certainly on its way, adding $ 500 billion to its value in just five months. And the company continues to take whatever steps are necessary, explained Michael Cusumano, deputy dean of MIT’s Sloan School of Management.
“They are growing again because the use of the cloud has increased,” Cusumano said. “They occupy very powerful positions.”
Microsoft continues to look to the future
While Nadella and the company could relax and make money by selling their cloud offerings to its existing install base of customers, Microsoft continues to innovate. In April, the company bought AI pioneer Nuance Communications for $ 19.7 billion, a move that will benefit everyone from Microsoft’s healthcare efforts to its customer engagement offerings.
The company also dives into the nascent metaverse space via its Mesh Teams software. The idea is to engage colleagues from all over the world in virtual meetings using everything from AR and VR headsets to their laptops, creating a sense of presence and making it seem like everyone is in the same room.
At the same time, Microsoft is deepening its gaming business with its Xbox Game Pass cloud-based gaming platform, a platform powered by Microsoft’s own cloud servers. The service not only marks Microsoft as a leader in the move to cloud gaming, but it also ensures that young users recognize Microsoft’s nameplate. It doesn’t hurt to also provide potential cloud customers with proof that Microsoft’s cloud servers are rugged enough for the most demanding applications.
And thanks to its more open nature – you can find Microsoft products on most operating systems – it has gained a lot of goodwill in the tech industry.
Of course, there is no guarantee that Microsoft’s current trajectory will continue. After all, many rivals are hoping to knock it off its pedestal, whether it’s Amazon’s AWS, Slack, Google’s Workspace, Sony’s PlayStation, or SalesForce.
For now, however, the once-under-the-radar software company is among the most innovative companies on the planet.
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